Singapore, May 26, 2015 -- Moody's Investors Service says that the Indonesian government's
(Baa3 stable) Islamic finance roadmap will encourage consolidation among
smaller Islamic banks in the country, and foster the development
of a larger domestic sukuk market.
"Despite growth rates in excess of 30% a year, the
Islamic banking sector only captures a 5% share of the Indonesian
banking system," says Khalid Howladar, Moody's
Global Head of Islamic Finance. "The Indonesian government's
Islamic finance roadmap should drive growth in the sector."
"The roadmap will also support the consolidation of state-owned
and commercial Islamic banks, which will in turn increase the size
of the banks' capital bases, improve cost efficiencies, and
allow increased underwriting in the corporate and infrastructure sectors,"
says Simon Chen, a Moody's Vice President and Senior Analyst
for the Financial Institutions Group.
Chen says consolidation would also boost the banks' profitability
levels and therefore their ability to generate internal capital and raise
external capital. The higher profitability levels will in turn
improve the attractiveness of the sector to investors; thereby driving
growth in the sector.
Moody's analysis is contained in its just-released report
titled "Islamic Finance: Indonesian Government Roadmap Will Drive
Growth and Consolidation of Islamic Banks," and is co-authored
by Chen and Howladar.
Moody's report says that since the end of 2005, Islamic banking
assets in Indonesia have expanded at a 33% compound annual growth
rate; outpacing growth in the conventional banking sector,
the latter of which has also shown rapid growth against the backdrop of
robust economic growth and the low penetration rate of financial services.
But despite this strong growth, Islamic banking assets comprised
only 4.6% of total system assets as of November 2014 —
up from 1.4% at the end of 2005 — and the number of
Islamic banks increased to 12 from three.
The lack of a deep sukuk market in Indonesia has also limited the ability
of Islamic banks in the country to raise non-deposit funding and
match long-duration Islamic assets — such as home financings
— with funding of similar duration.
Moody's report points out that Islamic banks operate less extensive
branch networks when compared to conventional banks, and their capital
bases are smaller. Such banks also mainly focus on riskier customer
segments such as retail, micro enterprises and small and medium-sized
enterprises, rather than corporates.
The riskier customer base has led to non-performing financing ratios
that are consistently higher than the comparable non-performing
loan ratios at conventional banks. These higher credit costs and
smaller economies of scale make Islamic banking less profitable than conventional
banking.
Moody's report also compares Indonesia's sukuk market with
that of its neighbor, Malaysia (A3 positive).
The report says that Malaysia's sukuk market is the largest and
most liquid globally, with a deep institutional investor base.
This market took three decades to establish but has thrived over the last
decade with the coordinated government support that Indonesia is now proposing.
Moody's report points out that Indonesia has an advantage in that
it can look at policy initiatives globally and learn from the best practice
of other jurisdictions, such as Malaysia.
The report also says that because Islamic finance is now commonplace among
many Middle Eastern and Asian countries, there is now a much larger
pool of stakeholders to support the global Islamic capital market;
of which Indonesia is a key part.
According to Moody's report, Indonesia's large domestic
population and affinity for Shari'ah-compliant finance makes it
highly likely that the country will become a much more significant contributor
to the Islamic capital markets in the future.
Moody's will be conducting workshops this year on Islamic finance.
The workshop in Jakarta will be held on Thursday, 28 May,
and the one in Singapore has been scheduled for Friday, 29 May.
Guests can register here:
Indonesia
Jakarta, Thursday, 28 May 2015 (9:00AM --
11:00AM)
To register, click http://www.cvent.com/d/prqswb/4W
Singapore
Singapore, Friday, 29 May 2015 (9:00AM --
11:00AM)
To register, click http://www.cvent.com/d/lrqs3z/4W
In addition to these workshops, Moody's is also hosting media roundtables
in these cities. For more details, please contact hector.lim@moodys.com.
Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1004137
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Simon Chen
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
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Stephen Long
MD - Financial Institutions
Financial Institutions Group
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Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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Singapore 48623
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Moody's: Indonesia's government roadmap will drive bank consolidation and growth of the Islamic banking Sector